Woodford: Ignore the naysayers; UK economy is just fine

The state of the economy is much more positive than the gloomy prognosis implied by market valuations

Woodford-Neil-700x450.jpgIncoming macroeconomic data in recent weeks has reaffirmed my view: regardless of what you may have read or heard, the UK economy is doing just fine.

Much has been written over the summer, in particular, about the consumer debt burden and its implications for future monetary policy and growth. I am less concerned about this, partly as a result of the low interest rate environment, which I expect to prevail for some time.

The recent inflation data, and the Bank of England’s response to it, do not change this view. Clearly, the probability of an interest rate rise in the near future has increased but I do not believe this heralds the start of meaningfully tighter monetary policy.

Indeed, the stronger pound that has greeted the recent policy rhetoric ironically does much to counter the inflationary forces that prompted the talk of rate hikes in the first place.

Consumer debt levels are manageable in the context of household incomes. Furthermore, as chart one illustrates, it is evident that the growth in debt we have been seeing over the last 18 months has not really been the result of a pick-up in consumer borrowing. It is corporate borrowers that have been taking advantage of the renewed appetite for lending in the UK banking sector.

And, in the context of recent history, although the rate of debt growth has increased as the banking sector has rehabilitated itself, it remains modest compared to the rates of growth seen in the early years of the new millennium. Further evidence to suggest worries about consumer debt are overdone.

Meanwhile, recent revisions to the way the national accounts are calculated, should also diminish the level of these concerns. Figures released by the Office for National Statistics last month, for example, suggest UK household savings have been running at a much higher level than had previously been estimated.

Admittedly, the UK savings ratio has still been on a downward trend, as one might expect in a period when the value of other parts of the balance sheet, such as equities and most households’ primary asset, the house itself, has been rising. The pace of the decline in savings, however, has been much less sharp than previously estimated.

Overall, official data confirms the UK economy has remained resilient in 2017, despite predictions the Brexit negotiations would precipitate a collapse in activity. That never seemed likely to me and the data, thus far, is supportive of this view.

Indeed, recent data – robust retail sales, better-than-expected public finances and a decent pick-up in housing transactions, for example – suggest a modest improvement in economic activity in recent months which, alongside renewed growth in money supply, bodes well for UK GDP growth in the second half of 2017 and beyond.

I remain positive on the outlook for the UK economy – much more positive than the gloomy prognosis implied by market valuations – and that is reflected in my long-term investment strategy. This is clearly not a popular position but that is exactly what attracts me to it. Some of the biggest valuation opportunities I have embraced in my career have been in contrarian calls, where market participants have deserted a particular part of the market for reasons which do not add-up from a fundamental perspective.

I believe we are seeing the same play out now and, as the evidence that the UK economy is in better shape than many have expected continues to mount, I am absolutely confident the outcome will be the same as it has been in the past.

Neil Woodford is head of investment at Woodford Investment Management

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Mr Woodford is undoubtedly a very clever man, but the UK economy fine?

    Poor productivity
    Rising inflation
    Brexit
    An inept government and a worse one in prospect.
    Huge public and private debt
    Many of our largest and best companies in foreign hands and the rest contemplating leaving.

    If this is fine I wonder what bad looks like?

  2. All of these factors are very difficult to read with certainty as to the future.

    On poor productivity some of this is down to the fact that we have more in work vs say France but more are lowly paid. France has much less in work but they are paid more and produce more. They have high barriers to entry for employment hence many unemployed (difficult to say if this is a success or not on that basis). Also the UK has a lack of ambition for automation (albeit that potentially staff shortages post the Brexit decision together with rising minimum wage / auto enrolment costs may change this).

    Inflation is an annual figure and the devaluation of sterling post Brexit is still working its way through as hedging falls away. Inflation is expected to fall back once this is complete.

    The Government doesn’t inspire confidence and many of the plans are tinkering around the edges of problems (a few more houses here or there instead of any bold solutions). A paucity of vision or inspiration is the problem for the current incumbents. The potential of the other party coming to power is more worrying as their wish to borrow when already heavily in debt could be a severe issue.

    Public debt is now rising more slowly albeit that our stock of debt is large. The problems are that we as a country need to keep the confidence of the markets and keep control of spending when the other party is offering free money and the public sector is looking for more (some justified some not).

    Companies have always been up for sale and this ebbs and flows. Some are investing considerably in the UK (i.e. Softbank at ARM). The UK has advantages and disadvantages and we will have winners and losers.

    It depends on your outlook and mine is to be more positive despite the gloom and look ahead and I feel Mr Woodford’s view is the same.

  3. Good grief, a carefully thought out and balanced view.

    You don’t see many of those on the threads these days.

    Well done.

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